By Simon Watkins
The International Sustainability Standards Board aims to unify sustainability disclosure standards. A consultation to be held this spring will be a test of whether companies can decide on a single framework.
For directors overawed by the acronyms used in reporting environmental, social and governance criteria, the International Sustainability Standards Board offers hope. Launched by the IFRS Foundation at the COP26 climate summit in Glasgow last year, the board aims to develop a single, global set of guidelines for climate-related disclosures.
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This umbrella reporting standard will swallow the rest of the alphabet soup of guidelines and organisations. By June this year it will combine the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF), which already includes the Sustainability Accounting Standards Board (SASB), and the International Integrated Reporting Framework.
Work is underway to develop the IFRS Foundation’s sustainability reporting standards. Before it launched the ISSB, the foundation published two prototypes for disclosure guidelines. Yen-pei Chen, a corporate reporting manager at the Association of Chartered Certified Accountants, expects the consultation to begin in March.
An activist in the chair
In the meantime the ISSB is building its board. On New Year’s Day Emmanuel Faber, the former chief executive of Danone, took the chair. ESG was a strategic feature during Faber’s tenure at the French multinational.
Observers regard Faber’s appointment as a positive sign. “It is quite intelligent to look outside the corporate reporting circle and appoint a businessman,” says Chen. "His role with Danone was very much driving that integration of sustainability … at a time when so many other companies weren't yet thinking about it.”
The idea of a single set of ESG reporting standards is widely supported in principle. The UK government, along with the International Organization of Securities Commissions and other groups, welcomed the launch of the ISSB.
Even those organisations that will be subsumed by the ISSB are bullish. “This allows management and the board of directors to communicate a complete view of enterprise value creation, which brings ESG information up to the same level of financial information,” says Neil Stewart, director of corporate outreach for the VRF.
For UK directors two questions still have to be answered: will the ISSB achieve unanimity around its prototypes, and do boards need to change their approach to ESG in preparation for a global standard?
The first ISSB prototype is based on the standards outlined by the international Taskforce on Climate-related Financial Disclosures. That model has been adopted as a benchmark by many companies, governments and regulators, including in the UK. This bodes well for British businesses that have begun work on their own disclosure systems based on the standards put forward by the taskforce.
Other methodologies are available, though, and for the ISSB to succeed, alignment must be international. In the US alone, the range of standards is considerable, with single companies often using more than one disclosure framework.
Of the 100 largest companies in the US, 99 issue a corporate social responsibility report, according to a study by Shearman & Sterling, the law firm. Eighty five of those use more than one disclosure standard in their reporting; for example, 70 use the Global Reporting Initiative framework, 77 use SASB and 78 turn to the UN’s Sustainable Development Goals.
The ISSB consultation will be a test of whether companies are willing and able to unite around a single framework.
Uncertainty in the boardroom
While it is still uncertain that the ISSB will succeed in its aim, boards must not delay acting on ESG, says Ding Li, the senior strategy consultant at Longevity Partners, a consultancy. The work of assessing and mitigating environmental impact must continue.
“On climate change [the boards] need to set performance indicators and target governance structures to make sure those initiatives are being implemented,” she says.
“If a company already has that strategy in place, knows what is material to it, and if it has set the direction knowing [the] issues it should focus on, then it will have the answers internally.”
The choice of which reporting framework to use is simply a matter of “asking the same question in different ways”, she says.
This does not mean that the ISSB is irrelevant. Its significance lies in creating a framework that holds all companies accountable to comparable standards.
“Shareholders expect boards to be fluent in climate and other ESG topics, which is hard to do without a common language,” says Stewart. The ISSB, he says, should not be seen as “just another abbreviation”.
This article is based on a piece published by Agenda.